Analyst Conference Summary

conference date: October 19, 2017 @ 1:30 PM Pacific Time
for quarter ending: September 30, 2017 (third quarter, Q3 2017)

Forward-looking statements

Overview: Good revenue and great earnings growth, with strong sequential systems sales.

Basic data (GAAP):

Revenue was $806 million, up 7% sequentially from $756 million and up 18% from $683 million in the year-earlier quarter.

Net income was $298 million, up 34% sequentially from $222 million, and up 41% from $211 million year-earlier.

EPS (earnings per share, diluted) were $2.55, down 56% sequentially from $5.77* but up 44% from $1.77 year-earlier.

*this seems wrong, but it is what was on the Q2 press release. Other figures may be adjusted for the stock split, even though it had not taken place at the end of the quarter.

Guidance:

Full year procedure growth for 2017 upped to 15 to 16% y/y. System placements by leasing trending upwards. Ave. system selling price trending lower. Gross profit margin 71% to 71.5% of net revenue. Operating expenses up 18% to 19% y/y, higher. Income tax rate 26.5% to 28.5% non-GAAP.

Conference Highlights:

CEO Gary Guthart said, "We expect growth in general surgeries outside the United States to continue to lead." Growth was solid in China, Japan, and Korea.

$21 million of revenue was from the deferred revenue for Q1 tradeouts.

The company began trading following a 3 for 1 split on October 6.

Intuitive Surgical shipped 169 da Vinci Surgical Systems, up 2% sequentially from 165, and up 26% from 134 in the year-earlier quarter. But 20 were shipped under leases, vs. only 15 in Q3 2016.

Procedures using da Vinci systems in Q3 grew 15% y/y. Growth was driven mainly by "U.S. general surgery procedures and worldwide urologic procedures." Procedures outside the U.S. grow 23%.

Revenue from Da Vinci system sales was $258 million, up 19% sequentially from $216 million, and up 26% from $205 million year-earlier.

Revenue from instruments and accessories was $401 million, up 1% sequentially from $398 million, and up 15% from $348 million year-earlier.

Revenue from services was $147 million was up 4% sequentially from $142 million and up 13% y/y from $130 million.

Non-GAAP numbers: Net income was $324 million, up % sequentially from $ million and up % from $246 million year-earlier. Non-GAAP EPS was $2.77, down 53% sequentially from $5.95, and up 31% from $2.06 year-earlier. Non-GAAP numbers exclude trade out revenues. 71.8% gross margin.

The cash and equivalents balance ended at $3.80 billion, up sequentially from $3.42 billion. No material share repurchases. There is no debt. Deferred revenue increased to $295 million.

Increased investment in next-generation products.

Cost of revenue was $239.3 million, leaving gross profit of $566.8 million. Operating expenses of $288.2 million included: $204.8 million for selling, general, and administrative; $83.4 million for research and development. Leaving income from operations of $278.6 million. Interest income was $10.8 million. Income tax benefit $8.1 million.

Q&A:

[note not all questions are included, and long questions and answers are made short]

2018 outlook for operating expense? Return to normal, around rate of revenue growth. In 2017 outperformed on revenue, so got higher leverage and margins. So no further leverage expected in 2018.

U.S. installed base vs. procedure growth? Procedures drive placement. 85% of systems placements in 2017 to existing hospitals. 90% of systems showed are fourth generation; most customers want the most advanced capabilities. But we don't give guidance on system placements going forward.

SP launch date? Waiting for questions from FDA, so no final timeline yet. No launch date set yet for Flex either.

Some of our gross margin improvement is from increased factory efficiency for new products.

Transenterix approval by FDA, implications for multiple indication approvals? We have already gotten some approvals under the new rule allowing some indications to be based on related indication evidence.

Chess Flex Catheter data? Competition? For 510K clearance, we don't know if the data will be sufficient. We have heard that others are working on flexible robotic catheters. We believe our customers want our robotic catheters.

Imaging has three parts: hardware, which we improve periodically. Software upgrades come out every year or two. Molecules are treated as drugs and are on drug timelines. The Gen 4 scopes are better than what was available 2 years ago. Diagnostic markers in surgery are under discussion with the FDA.

Will loss of surgery due to hurricanes come back in Q4? It is hard to estimate, but we guess Q3 had a 1% impact to growth rates from the storms.

Utilization and appetite for capital purchases? We have not seen an impact this year. Procedure growth is driving sytem placement.

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